Disney, Weighed Down By ESPN, Should Consider Sale Or Spin-Off, RBC Says

In a research note to investors, RBC Capital analyst Steven Cahall speculated on the possibility of Walt Disney (DIS) divesting ESPN, which he sees as potentially leading to strategic upside and share price accretion.

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DISCOMFORT AROUND ESPN: RBC Capital's Cahall noted that Disney's year to date underperformance, despite non-Media strength, indicates prolonged discomfort around ESPN. Disney's EBITDA has been growing at a healthy 10.2% compound annual growth rate, but investor concern around ESPN "has almost single-handedly" de-rated the stock, the analyst contended. Therefore, Cahall pointed out that separating ESPN would improve Disney's growth rate and more efficiently price the assets. A decision to divest ESPN ultimately comes down to how the company sees the long-term for TV sports, he argued, adding that he thinks the power of Disney is investments that tie entertainment content, parks, and products. The analyst reiterated a Sector Perform rating and $101 price target on Disney's shares.

VALUE CREATION FROM SPLIT: Cahall told investors that he sees a number of value-creating elements from separating ESPN. First, he expects valuation upside to the non-ESPN business based on the removal of an overhang. Second, splitting off ESPN might arguably put Disney more "in play" for M&A, the analyst noted. Additionally, he pointed out that monetizing ESPN would put cash on the balance sheet that the company can use for acquisitions, organic investments, or share repurchases. Speculating on possible splitting scenarios, Cahall said Disney could spin ESPN into a separately traded public company and lever it with a dividend back to the parent company or it could sell ESPN in a taxed transaction. A financial buyer that just runs ESPN for cash flow might pay $22B for the 80% stake, while a strategic buyer such as a large distributor or digital platform would arguably pay far more, he argued.

NETFLIX ACQUISITION: Meanwhile, rumors of companies that Disney could buy have recently circulated, with Twitter (TWTR) and Netflix (NFLX) having been speculated as possible acquisition targets. In a research note of his own on December 1, Bernstein analyst Todd Juenger noted that many investors ask him for his take on the idea of Disney acquiring Netflix. While he acknowledged the choice is not obvious in either direction and noted he is "not endorsing a deal," the analyst said that he is "surprisingly open" to a deal. Juenger pointed out that Disney could build a Netflix competitor for less than the $70B it would take to buy the company, but it would take a long time, the expense would drag on results the entire time, and it would still have a formidable competitor. However, acquiring Netflix could immediately make Disney the dominant, and maybe "unassailable," leader in global, on-demand, direct-to-consumer entertainment, he contended. The analyst reiterated a Market Perform rating on Disney's shares.

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Harry Goldstein 2 years ago Member's comment

Never understood the value proposition for #Disney acquiring #ESPN. A divestment or spinoff would be a good idea. $DIS

Sam Anwar 2 years ago Member's comment

I feel that a #Netlfix acquisition would be a smart decision. Given the fact that they have the content and infrastructure in place to support the high demand and traffic for #Disney's content. $DIS $NFLX